In defence of small state interventionism

Of all the reactions to the ‘summer Budget’ one of the most interesting was from Allister Heath in the Telegraph. He comes closer than anyone to identifying George Osborne’s economic philosophy:

“…it was the Chancellor’s intellectual journey that was the Budget’s most intriguing revelation. We now know that Mr Osborne’s brand of conservatism attempts to marry, not entirely coherently, a smaller state with extensive government intervention.”

There’s no doubting the smaller state aspect of the Chancellor’s plans:

“Mr Osborne is, above all, a fiscal conservative: he wants to balance the budget and reduce the national debt as share of GDP, with his new fiscal lock banning budget deficits in normal economic times – a key mechanism by which he hopes to entrench his legacy. It’s not just that Mr Osborne wants a prudent state: he also wants a much smaller one. Public spending would fall to 36.3pc of GDP by the end of the decade under his plans, reversing all the increases of the Gordon Brown years.”

This isn’t so much a matter of ‘rolling back the frontiers of the state’ as of government living within its means. Still, that in itself is a quite a turnaround.

But then there’s the other half of the Osborne formula:

“…while he doesn’t want the state to pay for everything, Mr Osborne believes in mandating others to do so on its behalf. He believes in a small state as a share of national income – but also in an ultra-active government that makes endless moral choices, fixes prices (thus blurring the divide with Labour) and tells the private sector what to do. That is where free-marketeers such as myself part company with the Chancellor.”

Allister Heath would much rather have the small state without the interventionism:

“A key part of Osbornomics is a rejection of the classical liberal notion that the government should step out of the way and allow individuals and companies to make their own choices, within a broad rule of law.”

Of course, George Osborne’s job is to be a conservative Chancellor, not a classically liberal one. But in combining a smaller state with government intervention, is the conservative approach incoherent?

I would argue that it is non-interventionism that risks incoherence. For a start, a state that spends 36.3 per cent of GDP may be small by contemporary standards, but in absolute terms it is still enormous. You cannot spend – or raise – that much money without having a massive impact on the life of the nation. Unless we were to realise the libertarian fantasy of the night-watchman state, the question is not one of whether the government intervenes, but how.

Secondly, why shouldn’t the government of the day intervene? In most respects the market is a better micro-manager than the state, but there are some decisions that need to be made collectively and at a macro-level. A government isn’t elected just to administer the public sector, but to lead the nation. This might be a problematic concept for classical liberals, but it should come naturally to conservatives.

Finally, government intervention – or national leadership – isn’t merely compatible with a smaller state, but necessary to achieving it. The health of British industry isn’t just a matter of favourable economic conditions and policies, but also of essentially social factors like management culture, business ethics and consumer behaviour. It’s vital that government doesn’t act in a way to create perverse incentives – as in the case of lax financial regulation or tax credits that subsidise low-wage models of employment. But even when incentives are perfectly aligned, the private sector – like the public sector – doesn’t always perform as well as it could do.

When this results in poor productivity, lower growth and fewer jobs, our leaders must decide whether to fill the gap with government spending or whether a well-aimed kick up the national backside might sort it out instead.